Assume the following: Melita carried an average daily balance of $430 on her cre

Question

Assume the following: Melita carried an average daily balance of $430 on her credit card this month. Her previous balance last month was $768

,compared to a balance of $97 this month. There are 30 days in this billing cycle and Melita always makes a payment on the fifteenth of the month. Based on this information, calculate the monthly interest charges for credit card accounts charging 16percent, 18 percent, and 20 percent interest. Complete the following chart. Since the average daily balance is the most commonly used balance calculation method, is shopping for a lower interest rate really that important?

Average Daily Balance -    $5.73 at 16%

Previous Balance -          $11.52 at 18%

Adjusted Balance -      $1.62   at 20%

The three primary methods used to determine interest charges on unpaid credit balances are (1) the average daily balance method, (2) the previous balance method, and (3) the adjusted balance method.

The monthly interest charges can be compared using the following table:

Average Daily Balance -    $5.73   at 16%

Previous Balance -            $11.52 at 18%

Adjusted Balance -           $1.62 at 20%

Question 1 - The amount Melita will pay in monthly interest charges based on the $430 average daily balance for the credit card account charging an annual rate of 18 percent is ? $ (Round to the nearest cent.)

Explanation / Answer

Using Average Daily Balance method to calculate the interest charges for credit card AVERAGE DAILY BALANCE $430.00 ANUAL INTEREST RATE 16.00% 18.00% 20.00% PERIODIC INTEREST RATE 0.0444% 0.0500% 0.0556% DAYS A MONTHS 30 INTEREST CHARGES $5.7333 $6.4500 $7.1667 (430 x 0.0444 % x 30) (430 x 0.0500 % x 30) 430 x 0.0556 % x 30) The amount Melita will pay in monthly interest charges   based on the $430 average daily balance for the credit card account charging an annual rate of 18 percent is $6.45

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